Capital Ideas

Issues that are influencing, or will influence, retirement plan sponsors and their participants.

PS816-TL-CEO-RT-PhotoBrock Johnson, President of Retirement Solutions at Morningstar Inc.; Peter Gordon, CEO of John Hancock Retirement Plan Services; and Anne Ackerley, Head of US and Canada Defined Contribution at BlackRock
During a roundtable discussion at the recent PLANSPONSOR National Conference in Washington DC, Brock Johnson, President of Retirement Solutions at Morningstar Inc.; Peter Gordon, CEO of John Hancock Retirement Plan Services; Anne Ackerley,  Head of US and Canada Defined Contribution at BlackRock, shared their thoughts about what issues are—and what should be—top of mind for plan sponsors and plan with Alison Cooke Mintzer, editor-in-chief of PLANSPONSOR. 

PS: Anne, are there factors that drive participants to the sidelines of investing, and should plan sponsors do more to encourage employees to invest appropriately depending on life stage? Are there options other than simply getting them into the QDIA? Maybe re-enrollment?

Ackerley: We look at participant flows every day, and fear, uncertainty and market volatility are the key drivers. We did a study recently and found that more than 60% of the participants we surveyed worry about market volatility, and only a third of the participants thought that they were invested appropriately. Considering this lack of confidence I think it comes back to the target date fund for many, many people. I think even at BlackRock, we’re investment professionals and most of us are in our target-date fund because it’s the right amount of risk at the right time in your lifecycle.

But all target-date funds are not created equal. What’s the goal of the fund suite? Is it to maximize wealth, is it to preserve or is it to have stable consumption? Plan sponsors can look at how target-date funds have performed during market volatility and see how well the target-date keeps people invested. If the fund is taking too much risk, people will tend to sell out of it, so I think it’s something to examine.

I would encourage all plan sponsors to do re-enrollment. I understand there are reasons why people don’t, but in our experience plan sponsors who do it find out that employees don’t get upset or complain, they’re actually pretty happy that you’ve put them into the right investment. 

PS: Anne, where do you see plan design heading? How should plan sponsors go about evaluating plan design changes or plan design elements at their firm?

Ackerley: We ask, “How can you improve retirement outcomes?” You can get more people in the plan, you can get people to save more and save earlier, and you can make sure they’re in the right investment to help them stay the course. Those are really the three levers you have. Auto features continue to be one of the most effective ways to help improve retirement outcomes. I think two-thirds of large plan sponsors today do auto-enrollment, but many of the smaller plan sponsors don’t. I had the recent experience with my 23-year old son in his first job. He wasn’t auto-enrolled and it took me six months to get him in front of his computer to take the five minutes to just sign up for his 403(b).

Leading-edge companies are making automatic catch-up contributions for people over 50. I haven’t seen too many people do that. I mentioned re-enrollment, but another option is re-allocation. People who came in before the PPA, why not put them into the target-date fund or QDIA?

Next I think is to focus on how participants will generate income from their plan savings in retirement. What is your distribution mechanism? Do you only have lump sum? Do you allow for periodic withdrawals?

It’s important for participants to measure where they are with their nest egg. Is that just the dollars, or is it actually income replacement? We think it should be income replacement. $300,000 sounds like a lot of money to people. But when they convert it to what it could be in retirement, it sounds like a whole lot less. So measure where people are and then have a roadmap for what plan changes will drive the most change.

PS: What is the role of the employer in addressing distribution decisions with employees at the time that they separate service? And how do you see that changing with the recent DOL fiduciary conflict of interest regulations.

Gordon: The DOL is speeding up all the trends that have been going on slowly for the last 10 years. This is a new catalyst. We all do systematic withdrawals, but that really wasn’t a focus on how to make that real. I think plan sponsors are going to have to get a lot more in tune to provide a much better solution regarding how you spend down in retirement, and that means really understanding what the liability is and using a little bit smarter science to really predict how much money you’re going to need in retirement. And once you’ve done that, you know the best way to fund it. We talked a lot about annuities, and even though I come from an insurance company I don’t think annuities are always the answer. Maybe a little bit of an annuity is the answer.

What we’re working on today is almost deconstructing an annuity. All the pieces that we use behind the scenes to create annuities—predictive analytics, data scientists whom we called actuaries for a long time—allow us to tell you when you’re approximately going to die and what the probability is of living past that age. We have a really good idea of how much money you’re going to need as you get further on in life and your long term care situation. We know how much money, depending on where you live, you are going to want to spend on leisure time. I think the next evolution is making that very personal to the individual, and then having a funding method that makes sense so that you get a paycheck in retirement. It’s society’s problem at the end of the day and we can squeeze a lot more. We all talk about not having enough. To say, no one’s saving enough, no one has quite enough, but you know if you’re really clever and smart you can squeeze out pieces and take the money that is already there and stretch it a lot further than it is today. I’m always for “Save more, please.” Let’s get to 15% but in reality we also have to figure out how to maximize what we do have and you’ve got to take into tax consideration, outside assets, and how much money you’re going to need as you head into retirement.

PS: Brock, there’s a lot of discussion about financial wellness, which I think is a buzzword that either doesn’t have a definition yet or has many definitions. What are we talking about when we discuss financial wellness and how is it currently being integrated in retirement plans?

Johnson: When people first heard about financial wellness, I think they equated it with budgeting, basically trying to identify where people are spending their money. Today we think of financial wellness differently than that. It’s bringing together a bunch of individual pieces to change people’s behavior and ultimately to get them to better outcomes. In building an advice solution, you really want to focus on the five rungs of the financial wellness ladder.

The first rung is simply helping people spend less than they make. The second is to help them build an emergency savings fund. And the third is to give them access to basic financial guidance. You need to address those primary financial issues first and then move to the last two rungs, which include optimizing benefits and investing more for retirement. One of the big reasons we acquired HelloWallet was to give us stronger capabilities on those first three rungs. The example I give is spending. Less than 30% of people have any type of budget let alone a good one, and studies show that almost 75% of people are living paycheck to paycheck. If we can’t put plans in place and help people on those lower rungs of the ladder, we’re never going to get them up there to help them with their retirement needs, their investments needs, their benefit needs.

There are lots of ways to implement a financial wellness solution. You can do it through online solutions like HelloWallet or through one-on-one meetings with advisors. You can even use educational materials, though we’ve found those to be the least effective delivery method. No matter which method you select, for a financial wellness solution to be successful, it needs to be personalized and holistic. It needs to bring all the pieces together into a comprehensive program, and it has to be something that can last a lifetime even as people change and their needs evolve. I think this is a great benefit for employees as it helps them maximize their benefits and improves their retirement outcomes. And the cost to offer this benefit is minimal.

But it is not only about helping employees. It also helps the plan sponsor by making their benefit offerings more competitive and their employees more productive. Study after study shows that the number one stress that employees have is their own personal financial stress. Financial wellness can help to address that, and you can get more productive workers if they’re able to put some of those concerns aside and focus on work. Financial wellness is good for both the employee and the plan sponsor in my perspective.

PS: Is engagement a myth or is there a way to engage at least some sort of participant group in the retirement plan to help them create better outcomes and understand what they need to do?

Johnson: We’ve had a lot of success by using behavioral science techniques to get employees more engaged and to take action. We’ve got a team of behavioral scientists at Morningstar, and we’ve moved the needle in little ways, but when you do that in a comprehensive manner, it can have meaningful results. Auto-enrollment is probably the best example of the behavioral science technique but there are a lot of more subtle, but effective ones.

The first time we put a plan sponsor logo on a communication, we saw 300% increase in engagement with the participants that received it. We’ve changed the subject line in a gender study and we saw the response from women increase three-fold. We sent out a communication at 5 p.m. on a Sunday versus 10:30 a.m. on a Thursday, and the engagement adoption rate jumped up from about 4% to well over 7%. We’re also working with a lot of outside experts in behavioral science because we really think it can have a significant impact on engagement and contribution rates.

Gordon: Engagement’s not a myth. It’s just not what people do every day. But if your design is really smart and can predict when people need it and you offered it up at the right time, you do get engagement and I think that’s the trick. This isn’t exactly a scientific poll, but when people come to my office, I say “What are the five apps you use on your phone?”

They all say they have 30 or 40 and that they use four: social media, mapping, where to go to eat, and some sort of payment. I’m like “What’s that?” It’s not even banking, it’s a way to push money around. There are a few people that check their 401(k) and get engaged with the apps. Let’s be clear, that’s not really going to happen. But there is opportunity. At certain times people are paying a lot of attention and are very engaged. If you’re able to get them the right information that meets their needs, when they’re looking, enrolling, leaving—that’s the time to engage them.